Armed with sweeping powers under the Enterprise Act, investigators acting for the regulator Ofgem will have the right to raid offices and seize documents.
They will be looking for evidence that the inflation-busting price rises announced this year have been co-ordinated or that smaller rivals are being thwarted from competing by hidden transactions. Ofgem announced the inquiry after British Gas revealed a 500 per cent rise in profits to £571m, four weeks after increasing its prices.
The company and four others – EDF, E.On, nPower and ScottishPower – say that they have been forced to raise bills by about 15 per cent because of soaring wholesale prices affected by the booming oil price. But consumer groups complain the rises have been suspiciously similar and warn that low-income customers are being forced into having to choose between eating and heating. If any of the players in the £24bn-a-year industry is found guilty of colluding to fix prices or engaging in other forms of anti-competitive behaviour, Ofgem can impose a fine equal to 10 per cent of worldwide turnover.
As a result, Centrica, which owns British Gas and has a turnover of £19bn, would face a maximum fine of £1.9bn, while other companies such as EDF, owned by the French state operator, and the German power giant E.On, would face similar fines.
Ofgem, which revealed the new inquiry just seven hours after Centrica announced its profits to the Stock Exchange, stressed yesterday it had no evidence to suggest that any supplier had acted illegally.
As reported by The Independent yesterday, British Gas made unusually large profits in the first quarter of last year by keeping prices high while the wholesale price of gas went into freefall as a result of a mild weather and a new pipeline from the Continent.
Amid concern that companies were colluding to fix prices, Ofgem was called in to see the Chancellor, Alistair Darling. Afterwards its chief executive, Alistair Buchanan, "confirmed" the energy market was working properly and bills were being driven up by rising global energy costs, the cost of curbing climate change, increased investment in reliable energy supplies and a lack of market liberalisation in the rest of Europe.
But at 2pm, after complaints about British Gas's profits had dominated television and radio bulletins for hours, Ofgem performed a U-turn. Mr Buchanan said that although the regulator was maintaining its position, it was calling an inquiry because of public anxiety and concerns that the market was rigged.
"Customer confidence is vital for a well-functioning market," Mr Buchanan said. "So we shall replace our magnifying glass with a microscope and take a more detailed look at the retail market and the influence of global wholesale market developments."
The investigation will look at the relationship between retail and wholesale energy prices and how, with the help of the European Commission, European markets are affecting costs in Britain. It will assess suppliers' market shares, switching rates for different groups of customers, and the experience of companies trying to break into the energy market. The ability of consumers to move smoothly to rival companies will also come under scrutiny.
Amid concerns that those on low incomes are struggling to pay, Ofgem announced a fuel poverty summit would take place in April attended by Hilary Benn, the Secretary of State for Environment, Food and Rural Affairs.
Energywatch welcomed the high-profile, formal investigation as "a necessary response to the extreme level of consumer concern" about the energy market.
Ofgem insisted that its inquiry had not been called because of the British Gas announcement. The watchdog has previously described the notion of price-fixing in the industry as a "red herring". Instead, it said, the industry is uncompetitive because there are too few big players and that smaller rivals have difficulty gaining access to the market because of a lack of transparency in prices which, in turn, is down to the fact that the companies own the generation and the sale of power – a vertical integration it says acts against consumers.
British Energy, which sells electricity from its nuclear plants, has backed the complaint.
All but one of the big energy companies – Scottish & Southern Energy is holding prices until the end of March – have put up bills after npower began the latest round on 4 January.
Energywatch complained that the price rises were "depressingly similar", with only £13 a year difference for a household paying by direct debit for dual fuel.
MPs on the Commons Business, Enterprise and Regulatory Reform Select Committee have launched their own inquiry into the possibility of anti-competitive behaviour.
British Gas, however, said that there was no need for Ofgem to investigate the industry. "We believe the market is competitive and working as it should," a spokesman said. "There have been 15 inquiries into the energy market in the past seven years and each of them has given the industry a clean bill of health. Only last month Ofgem issued a statement after a meeting with the Chancellor stating, 'today Ofgem chairman Sir John Mogg and chief executive Alistair Buchanan confirmed that Britain's competitive market in energy is working'."
Duncan Sedgwick, chief executive of the Energy Retail Association, said: "There have been a number of investigations into the energy retail market in recent years and all of these have shown that it is working successfully and in the best interest of consumers.
"Britain continues to have the most competitive energy market in Europe and we have no reason to believe that the Ofgem probe will find anything new."
Ofgem urged anyone with evidence of anti-competitive behaviour to come forward.
Two months of energy market turmoil
4 January
Npower raises price of gas by 17 per cent and electricity by 13 per cent.
15 January
EDF raises price of gas by 13 per cent and electricity by 8 per cent.
The Independent publishes figures showing that the industry makes 10 times more in extra charges to pre-payment customers, many on low incomes, than it hands back in help to those on low incomes.
Energywatch demands an inquiry by the Competition Commission.
16 January
Ofgem is called in to see the Chancellor, Alistair Darling. After the meeting, Ofgem insists there is no evidence of the market malfunctioning, saying: "Britain's competitive market in energy is working."
21 January
British Gas raises prices for gas and electricity by 15 per cent.
1 February
ScottishPower raises price for gas by 15 per cent and electricity by 14 per cent. Energywatch renews its call for an inquiry, saying: "Four, supposedly cut-throat, competitors have raised their prices by near identical amounts in days of each other."
5 February
Commons Business Enterprise and Regulatory Reform Select Committee announces an inquiry into the industry.
7 February
The Independent reports that at least 13 million customers are overpaying for their supply.
E.on raises price for gas by 15 per cent and electricity by 10 per cent. Scottish & Southern says it will honour its price promise until 30 March.
Thursday 21 February
British Gas reveals 500 per cent rise in profits, as predicted by this newspaper. Consumer groups express outrage.
Ofgem announces a formal inquiry into the industry.
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